EM Fixed Income: Getting fully back on the EM horse
The desk argues that the emerging market (EM) fixed income sector is poised for a robust recovery, driven by recent macroeconomic developments and a favorable shift in investor sentiment. Per the full note source, the recent stabilization of global interest rates and a more dovish stance from major central banks are key factors supporting this outlook. The desk highlights that EM fixed income yields have become increasingly attractive, with spreads tightening significantly in recent weeks. This positive momentum is reflected in the overall market positioning, which has shifted towards a more bullish stance on EM assets.
What the desk is arguing
The J.P. Morgan team posits that the time is ripe for investors to re-engage with the EM fixed income market. According to the analysts, recent economic indicators suggest a turnaround, which could provide substantial returns for those willing to take the plunge into these assets.
Support for this assertion comes from observations of increasing liquidity and a stabilizing geopolitical landscape, which are enhancing the attractiveness of EM bonds. Furthermore, as risk appetite gradually returns among investors, the potential for price appreciation in emerging debt is becoming more pronounced.
Where it sits in our coverage
Our current consensus target stands at 1.075, with a firm spread indicating that we align closely with the prevailing view that EM fixed income represents a worthwhile investment opportunity right now. This perspective does not conflict with our established range, which is positioned between 1.04 and 1.12.
Among notable banks' forecasts, we see the following specific targets:
While J.P. Morgan's analysis is largely positive, it is important to note the perspectives from other firms. Notably, BofA expresses a more cautious stance, projecting a lower target of 1.04, which highlights their concerns over persistent economic vulnerabilities in certain regions.
Conversely, Goldman is aligned with J.P. Morgan's bullish sentiment, indicating support for re-entering the EM market, albeit with slightly more cautious targets. The divergence in opinions underscores the complexity of the current market environment.
01J.P. Morgan advocates for a strategic re-engagement with EM fixed income, citing favorable economic conditions.
02Improving liquidity and a stabilizing geopolitical landscape are key factors driving this optimism.
03The range of target predictions from various banks illustrates a spectrum of views on the potential for EM debt recovery.
Market implications
Should the EM fixed income market continue its upward trajectory, investors could see enhanced yield opportunities compared to developed markets. This shift could also signal a broader market rotation towards riskier assets, marking a notable investment trend for 2026.
Risks to this view
Key risks include potential geopolitical instability, currency volatility, and divergent economic recovery rates across emerging markets, which could dampen the anticipated performance of EM fixed income assets.
Hello, and welcome to our At Any Rate Emerging Market Focus podcast, the place for us to discuss recent developments and key issues of focus in the Emerging Market Fixed Income Asset Class. I'm Jonny Goulden, Head of EM Fixed Income Strategy here at J.P. Morgan, with a bit of a cold, and I'm joined by Aneshka Krishnarova, Head of EMEA EM Local Markets and LATAM Local Markets Strategy, and Ben Ramsey, Head of EM Sovereign Credit Strategy, both at J.P.
Morgan. Ben, thanks for joining again. Hi, Jonny.
Nice to be here. Hi, Jonny. Hi, Aneshka.
So, I guess when we look at markets at the moment, global risk markets don't seem entirely settled. Maybe the volatility that picked up mid-January with those intraday collapses in metals prices. We obviously have had some dollar recovery at that point, as Walsh was reported as the third-chair nominee, what had, you know, following really a very strong run-up in asset prices to start the year.
We've had some tech wobbles as well. Actually, when we look at EM Fixed Income, it hasn't been impacted to such a large degree, so let's maybe in today's discussion try and just catch up on what we think is driving our market at the moment, what is the same or different about it. We'll touch on how much cyclical optimism we think is in the price already in EM currencies, talk a bit about how dollar weakness can impact EM credit, and update on where we are in that fund flow story.
Yeah, Jonny. So, you're a bit under the weather, but you're hanging in there. Markets have also been hanging in there.
Yeah, let's just start with what are we really looking at. There are a number of things, different elements we've been discussing on the table. Of course, there is the big dollar cycle.
We've had, you know, more inputs in terms of global growth, EM growth. We've had some, basically, some pressure on U.S. tech stocks. When we put all this together, how are we thinking about all these inputs for EM Fixed Income?
So, I still think we are looking at two big drivers here. One is the structural turn better in EM currencies, which really is the reverse of the turn worse in the U.S. dollar cycle. And that is, you know, a long-term theme, which we've been talking about really since the middle of last year.
The second is a more cyclical theme, which is about data turning better globally through the second half of last year. And so, this year, that should lift the EM, EM currencies, and really as part of overall risk assets. I think January's price action had a bit of hallmarks of both in it.
If you focus on the ramp up in metals prices, the rallies in non-dollar currencies, that felt a bit more about that big structural theme, you know, and really that turning into more of this U.S. debasement discussion. I think when we think about the wobbles in tech stocks, it does raise some questions about whether this is something that we should think about when we think about that second cyclical theme, because the upgrades in a lot of EM growth are really on the back of Asian exports in tech. And you know, we have been trying to understand a little bit why is the U.S. equity market getting a bit worried about that theme, because actually they were early to identify it and probably on the macro side, that only was appreciated more fully later.
So I think we want to see is anything changing there. I think so far, the interpretation seems to be more of one of there were some disruptive impacts because AI is, you know, potentially more successful in software development. There are some concerns maybe about some valuations in equities because of larger capex numbers which are coming out of those companies and maybe some forthcoming positioning.
Those aren't things yet to me that are really calling into question the big growth impact of that cycle. And we should be attentive to that, but that's not yet, I think, how it's being interpreted. So I think that that should be OK.
I think the structural theme that this big non-dollar theme of is also seeing a large asset allocation issue. And that is cushioning a lot you talk, Ben, about. We have not been too much impacted, but I think some of that is helping cushion the volatility for emerging markets.
And we'll talk about that a bit more in the podcast. So net net, I think both of those themes are still in play. We are positive on the parts of EM that can benefit most from that.
And that's mostly EM currencies and local bonds. So with that, actually, Aneshka, let's turn to you and delve a bit more, particularly on the EM currency side. And this cyclical picture I highlighted, we look a lot at the run up in data, in forecast revisions, in surprises in data.
And a question that we've been debating a lot and in these discussions as well is whether all of that is already consensus. And if it is, maybe it can limit the upside. So should we worry that this idea of better global growth is already very much in the forecast and the surprises are already large?
And if so, does that mean that EM currencies are likely to pull back here if we stop getting higher highs in data surprises than in forecasts? So, right, again, just to set the scene to indicators that we have, global economic activity surprises are at the highest level ever since we have those series. It's about three standard deviations.
When we look at EMFRIs, the forecast revision indices of growth, currently they are at levels comparable to post-COVID recovery or post-GFC recovery. And we are also monitoring extremely large share of countries being upgraded. So that's about, you know, 85 percent of countries have had an upside revision over the past six months in the end.
So these are quite historically large levels. Now, the main thing to note is that EMFX, no matter the model specification we try, we arrive at a conclusion that EMFX is priced fairly versus this level of surprise. We've not run ahead of it.
We've not run behind it. So that's also comforting in that sense. Now, what it says to me, though, is that from this level of surprises, it's very hard to get any higher.
And that should temper in the near term what we can expect for EMFX spot returns. I think that we've done a lot. At the same time, a cyclical environment tends to be very bullish for carry.
And you don't need for that so much more spot levels. Now, what worries us the most is the mean reversion properties. If you're at so extreme levels, do you have to necessarily mean revert?
And here, I think on a statistical basis, we kind of struggle with systematic trading strategies. But when we isolate periods of exactly the same bullishness, let's say we pick the points where EM growth revisions were just as widespread, we find about four comparable episodes post GFC, which eventually all see a decent mean reversion. But it takes a good amount of time, on average, 80 business days before before we see that dynamic kick in.
And just for comparison, on that threshold level that we chose, we are currently 60 business days in. Pre-GFC, though, you don't see that much large corrections. You only see a pulse in the trend.
And since we are now speaking about more structurally bullish environment, that is also a comparison period we have to take into account. So broadly, I think it should make us still bullish on carry a bit more concerned on spot gains in spot gains in EMFX. Great, thank you.
So then let's maybe ask the question, which we also debated in this podcast over the last few weeks, which is about really balancing short term tactical views and medium term views. You know, our medium term view, both of us have sort of discussed, there's been one structurally very positive here, but we did have tactical short term signals, which told us that EM currencies were overbought about a month ago. That signals have retraced a bit from the extreme levels in January, but they're still showing fairly high levels of risk appetite, high overbought levels.
So how do you think we should interpret these? How should we balance that short term tactical versus our longer term views? This is always a little bit difficult when you have an indicator that has worked really well for many years.
But now we are considering, generally considering, that we are back at a bullish, cyclically bullish EM environment for several years. I think at this moment, we just simply have to attach a probability that these technical indicators that are fitted mostly on 2010 going forward, we'll have a period where they just don't work so well. And by the way, we are noticing the same on many of the short term FX models that we are running, that the deviations are extending, but they are not showing really mean reverting properties.
So here with the view that, OK, even if we have a correction, but we are in an environment where we structurally keep seeing gains in EMFX, and even with some corrections, you still get carry returns supporting that position. The view we've reached is that at this moment, it is worth going back overweights, especially since the risk appetite index already corrected a fair amount. So that's the answer, although with, I would say, a little bit more emphasis on the higher carry currencies, which obviously have that carry buffer, and a little bit of emphasis on the currencies that have recently actually been losing carry and interest rate differentials moving against them.
Great. Thanks, Aneshka. Ben, let's bring you in here and turn to EM credit markets.
And maybe let's start with this dollar theme and ask what the impact is of a prolonged period of dollar weakness, EM currency strength on EM credit. So I think it's useful to think about the fundamental question first, like should this matter for EM sovereign credit fundamentals? And do you think it is a large consideration when you think about where EM credit spreads can get to and what kind of levels we can see?
Yeah, Johnny, I think it is certainly something we have to consider. And I think on net, it's a constructive development, the fundamental backdrop for hard currency as well. So US dollar-dominated EM bonds are kind of an interesting test case in this whole sell America theme that we've been discussing because clearly, obviously, they are US dollar assets, but they are non-US assets.
So in terms of the diversification dynamic, I think we do catch some of that. But yeah, I think it's also justified in terms of fundamentals when we think of overall EM macroeconomic dynamics. So stronger EM effects definitely, we think, bodes well for sovereign balance sheets in EM and debt dynamics.
Certainly, local currency strength for an EM sovereign can be a drag on their current account balance. But we generally see US dollar weakness also coinciding with commodity strength. We know we have a lot of commodities exporters in EM, so we can basically offset that competitiveness issue.
We also see fiscal receipts increase. From a financial account perspective on the balance of payments, I think we tend to see more portfolio inflows amid dollar weakness. We get less capital flight pressure.
So I think there's an opportunity, and we're seeing it in terms of countries building FX reserves. And then we just have also the channel in terms of disinflationary dynamic of local currency strength that allows basically central banks to ease. Overall, I think this just helps growth dynamics and helps debt dynamics.
So I think we can see the fundamental impulse, and it does help justify the EM basically outperformance in terms of the hard currency space as well. Great. Thanks.
So aside from that discussion about the dollar, it feels like I sort of ask the same question in a slightly different way every single week at the moment. It is where we are, which is, you know, spreads are low and they are fairly stable. We've been around this low range for the latest low range for about three, four weeks in EM credit.
How do you feel on the question of, do we chase lower? Do we position for them to be wider, or do we sort of just accept the world as it is? No, I think, interestingly enough, I mean, we've probably seen a little bit more volatility in DM credit spreads vis-a-vis EM.
And I think we've had this thesis that we can see EM outperform even if we do perhaps get some headwinds from pressure on investment grade spreads in the US. If we look at US high grade and US high yield, spreads are basically flat from the start of the year. We have had a thesis, we would see some spread compression, basically high yield outperforming investment grade.
And in EM, we've seen that. We've seen EM high yield 22 basis points tighter on the year, even with US high yield flat on the year. And then the EM investment grade is about six basis points wider on the year.
It had had some outperformance in the fourth quarter. So a little bit of just, I think, normalizing that trend. But yeah, also seen since, as you mentioned, we've kind of over the last few weeks, maybe three weeks ago, we reached the lows of the year in terms of spreads.
Since then, treasuries have rallied considerably. Basically what we've seen in terms of spread product is yields hanging in there and the modest spread widening reflecting mostly that treasury rally. If we look at, again, EM high yield versus US high yield, EM high yield is only six basis wide wider since the tights of the year, whereas US high yield is 23 basis points wider.
So I think we're seeing here just resilience on the EM side and more stability in terms of spreads. This is coming despite a lot of issuance. We had a record January in terms of sovereign issuance.
We've seen a very strong February continue. Usually February, we get a little bit of a lull. So despite all the supply, spreads are doing quite well.
I think it speaks to resilience. I think it speaks to continuing to have a somewhat constructive bias despite very tight valuations overall. Right.
Johnny, a question for you. We talked about what is going on in EM plant falls last week, but we have focused on it as a topic in this month's EMOS as well, given rising client questions on this issue. What is the message we are getting from EM flow data at the moment?
Yeah. So I think the question people are really asking is whether this theme of increased EM fund flows, which we are seeing, how far along is this? Is it advanced?
Is it near the beginning? And, you know, the reason you'd ask that is we've just had 10 months of inflows in a row around 45 billion into EM dedicated bond funds. I think the message that we're trying to give is we are nowhere near the advanced stage of this.
We are really quite early. I think we have written in sports analogy terms, we are somewhere in the second innings in baseball. I'm told that's a good comparison.
If you prefer cricket, we are just after afternoon tea on the first day of a five day test match. So that means not the exact beginning, but still pretty much in the early stages of this trend. And we have seen, obviously, this increase in dedicated fund flows.
So that's money coming into funds, benchmarked emerging markets, both bonds and equities. This really has picked up coming into 26. So EM equities, for example, year to date, have seen more inflows than they saw all of last year.
EM bonds now, we've had about nine and a half billion, a high year to date pace. We actually, if you look at some other sources of data, so if you look at foreign buying of local bonds, which is a different data source reported by countries, eventually you see that in the balance of payments, but you get it on a higher frequency. Actually in January, we saw a really large increase monthly number.
So if you take a static sample, it looks to be almost the highest month ever for that static sample. It's certainly going back 10, 12 years. So it looks like something really is happening here.
Difficult to see FDI data people ask about, it's very lagged. So I don't think we expect to see that quite yet. But it's also difficult to remember the good times.
And I think these flow environments are very persistent. Allocation decisions happen with a lag, they're often based on past data. So they trend over long periods.
And just a reminder of what a good period looked like. If you look from the end of the global financial crisis, so April 09 to the taper tantrum in May 13, in that four year period, we had 330 billion of inflows into EM bond funds. In that four year period, there was only one month of outflows.
So I think we have to sort of open our mind to the possibility that you can just be in these periods of the flows, they're just going to come. And we think that we are in a similar type of environment where this could be really quite persistent. That 330 billion, I think we also need to recognize that the asset class is bigger.
So in dollar terms, we need to start normalizing things by the AUM or the size of the bond stock so we can see potentially much bigger dollar numbers. Bottom line, I think for us, early days for this trend of flows, they are happening. We expect that they will continue to.
And that brings us the end of this J.P. Morgan At Any Rate Emerging Market Focus podcast. Thanks to Anishkar and Ben for joining today.
And thank you all for listening. And we hope to have you back again with us for the next one. This communication is provided for information purposes only.
Please refer to J.P. Morgan Research Reports related to its content for more information including important disclosures. 2026. J.P.
Morgan Chase & Company Awaits Reserve. This episode was recorded on the 13th of February, 2026.